As most company directors should know, they are responsible for the management of their companies. Directors must act honestly and promote the success of the business for the benefit of the shareholders. In addition, they also have responsibilities to the company’s employees, its trading partners, and the state.
Directors have wide powers to help you promote the company. However, they can come up against serious penalties if they abuse those powers or use them irresponsibly.
The Supreme Court has recently handed down judgment in the case of BTI 2014 LLC v Sequana SA and ors [2022] UKSC 25. It is an important decision which clarifies the duties a director owes to company creditors, and at what point in time those duties are triggered. It will also assist insolvency practitioners (IPs) in deciding if insolvent company directors have breached their duties, and whether claims can be brought against them should an insolvency situation arise. This is of course so relevant as the future for many businesses may seem a little rocky at the moment.
The Court of Appeal held that the creditor duty did not arise until a company was either insolvent, on the brink of insolvency, or probably heading for insolvency. BTI then appealed to the Supreme Court who unanimously dismissed the appeal.
The decision in Sequana helpfully confirms the existence of a director’s duty to act in the interests of the company’s creditors, and affirms the decision in West Mercia Safetywear Ltd v Dodd [1988] BCLC 250, the previous leading authority on creditor duty. The judgment moves away from the Court of Appeal’s construction of the creditor duty. The Supreme Court found that it is not enough that insolvency itself is likely or probable before the duty is engaged.
It is vitally important that directors are always aware of their statutory and fiduciary duties. This is perhaps most important when the company is at risk of insolvency. Further, it is also important to note the difference between the probability of insolvency, which could be temporary, and that of entering a formal insolvency procedure. This will impact insolvency practitioners who are required to consider claims against directors. The threshold for bringing a claim against a director is now higher.
In any event, is it very important that directors who are running companies that are having financial difficulties, or expect to have financial difficulties, take sound legal advice. Additionally, insolvency practitioners, before bringing or defending claims for breach of duty, should likewise take appropriate advice.
As one of the only law firms in the New Forest to offer Commercial Litigation and Company and Commercial legal services, Scott Bailey are ideally placed to help guide directors, and their companies, through the upcoming difficult economic times. If you would like advice on how these important changes could impact you or your business, please contact Phillip Baldwin ([email protected]) or Ben Ironmonger ([email protected]).
